Weekly Commentary: Q4 2023 Z.1: Bubble Confirmation

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 The Federal Reserve’s “Financial Accounts of the United States – Z.1” – where the rubber meets the road. Our quarterly read on systemic monetary (in)stability. Often concerning, but always refreshing: no Wall Street spin or BS – just 190 pages of data. And like booming securities markets and conspicuous speculative excess, Fed officials can ignore their own Credit and flows data at all our peril.

Q4 Non-Financial Debt (NFD) expanded at a seasonally adjusted and annualized rate (SAAR) of $3.500 TN, down marginally from Q3’s (SAAR) $3.874 TN – but up significantly from Q4 2022’s (SAAR) $2.244 TN. This put 2023 NFD growth at $3.625 TN, down only somewhat from 2022’s $3.785 TN. Notably, 2023 NFD growth was 46% higher than pre-pandemic 2019 ($2.472 TN) – the strongest Credit expansion since 2007’s record $2.530 TN.

At $73.808 TN, NFD has more than doubled (108%) since the end of 2008. NFD-to-GDP has inflated to 270%, up from 2007’s then record 233% – and the 191% to end the nineties. Since the end of 2007, Treasury Securities have inflated 324% – from $6.051 TN to $26.227 TN (to 94% of GDP from 41%). Total Treasury and Agency Securities ($38.187 TN) have inflated to 137% of GDP. Adding to “government finance Bubble” analysis, even after about 18 months of “quantitative tightening,” the Fed’s balance sheet ended 2023 $5.773 TN, or 607%, larger than Q4 2007.

Q4 data confirm that government finance Bubble dynamics run unabated. The SAAR $2.878 TN increase in Federal Government borrowings accounted for over 80% of the period’s NFD increase. For the year, Federal borrowings increased $2.620 TN, up from 2022’s $1.547 TN, and the largest gain since 2020’s $4.581 TN.

Private-sector Credit growth slowed. Total Q4 Household Borrowings declined to SAAR $485 billion, down from Q3’s $622 billion and lower than Q4 ‘22’s $634 billion. Q4’s decline was despite Consumer Credit jumping to SAAR $166 billion from Q3’s $27 billion. Total Business borrowings slowed to SAAR $173 billion, from Q3’s $294 billion and Q4 ‘22’s $720 billion.

Domestic Financial Sector borrowings recovered to SAAR $695 billion, after two straight quarters of contraction.

Perhaps an inflection point for bank lending, the banking system came back to life during Q4. Bank (“Private Depository Institutions”) assets expanded nominal $401 billion (to a record $26.159 TN), fully reversing Q3 and Q2 declines. At nominal $151 billion, Bank Loans grew at the fastest pace since Q4 ’22 ($358bn). Mortgage loan growth slowed to $50 billion (3.0% annualized), while Consumer loans increased to $41 billion (6.0% annualized). Bank holdings of Debt Securities jumped $188 billion, or 12.8% annualized, to $6.058 TN – the largest increase since Q4 ’21. Treasury holdings rose $92 billion (to $1.521 TN), while Agency/MBS gained $103 billion (to $3.086 TN).

On the Bank Liability side, Deposits (Checking and Savings) expanded $163 billion (to $20.312 TN), the first increase since Q1 ’22. This ended a $1.128 TN six-quarter deposit slide. Yet, Total Deposits inflated $4.779 TN, or 30.8%, over four years.

The bigger Credit story continues to unfold in market-based finance. Broker/Dealer Assets expanded nominal $119 billion, or 10% annualized, during Q4 (to a record $4.876 TN) – the strongest growth since Q1’s $433 billion. This put 2023 growth at a notable $505 billion, or 11.5%.

Broker Loans posted their first increase ($16bn) in seven quarters, while Treasury holdings rose $21 billion (to $269bn), Corporate Equities $32 billion (to $283bn), and Miscellaneous Assets $39 billion (to $1.739 TN). On the Liability side, Security Repurchase Agreements (“repo”) jumped $43 billion to $2.110 TN, the high back to Q3 2012. Repo Liabilities surged $484 billion, or 29.8%, during 2023. The repo market essentially financed the Broker/Dealer’s strong 2023 balance sheet growth.

Overall, the Repo market contracted nominal $332 billion during Q4 to $6.253 TN, following virtually the same Q3 drop. This contraction is entirely explained by the rundown in the Fed’s “reverse repo” asset. Excluding the Fed’s position, the Repo market actually expanded another $140 billion during Q4 to a record $4.863 TN. Repo ex-Fed surged $1.189 TN, or 32.4%, during 2023. Curiously, the Rest of World (ROW) Repo Liability expanded another $113 billion during Q4 to a record $1.689 TN, with a notable ’23 gain of $528 billion, or 45.5%.

Interesting developments also in the colossal Money Market Fund complex, today’s largest Repo market investor and key intermediary of speculative Credit. Money Fund (MF) Assets expanded another $215 billion, or 14% annualized, to a record $6.358 TN. Assets inflated $1.135 TN, or 21.7%, during 2023, with four-year growth of a blistering $2.355 TN, or 49.4%. Repo holdings declined $283 billion during Q4 to $2.666 TN, with a six-month drop of $567 billion. Meanwhile, Treasury holdings (T-bills) surged $502 billion, with six-month growth of $1.026 TN. Amazingly, MF boosted Treasury holdings by $1.205 TN, or 113%, during 2023. Money Funds also last year boosted Agency debt holdings by $128 billion, or 22.1%, to $798 billion.

Led, of course, by Treasury Debt, Total Debt Securities expanded $1.065 TN during Q4 to a record $59.196 TN – the largest increase since Q4 2020 ($1.092 TN). Total Debt Securities inflated $3.313 TN during 2023, with 18-quarter growth of $13.451 TN, or 29.4%.

Equities surged $7.901 TN during Q4 to $78.053 TN, second only to Q4 ‘21’s $80.061 TN, with 2023 growth of $13.350 TN, or 20.6%. Since the end of 2008, Equities have inflated $61.789 TN, or 380%. Equities-to-GDP ended 2023 at 279%, a record when excluding the pandemic period. This greatly exceeded previous cycle peaks 188% (Q4 2007) and 210% (Q1 2000).

Total (Debt and Equities) Securities inflated $8.967 TN during Q4 to a record $137.249 TN, with growth lagging only year 2000’s Q2 ($12.327 TN) and Q4 ($9.994 TN) recoveries. Total Securities rose $16.663 TN, or 13.8%, over one year, and $40.736 TN, or 42.2%, in 18 quarters. For perspective, prior to the pandemic, the largest annual Total Securities increase was 2019’s $12.515 TN.

Inflating securities markets continue to fuel historic Household balance sheet inflation. Household Assets jumped $5.009 TN during Q4 to a record $176.743 TN. Financial Asset holdings expanded $5.561 TN (to a record $118.832 TN), while Real Estate dipped $593 billion (to $49.073 TN). With Liabilities increasing $170 billion, Household Net Worth surged $4.839 TN to a record $156.214 TN. Net Worth inflated $11.587 TN in 2023. For perspective, previous Net Worth peak cycle inflation was 2004’s $6.862 TN and 1999’s $3.973 TN.

Household Net Worth-to-GDP ended 2023 at 571%. This compares to previous cycle peaks 488% (Q1 2007) and 444% (Q1 2000).

Household Total Equities (Equities and Mutual Funds) holdings jumped $3.291 TN during Q4 to $43.002 TN. Excluding the pandemic period, this was a record 154% of GDP (previous cycle peaks 104% (Q3 2007’s 104% and Q1 2000’s 116%). Debt Securities holdings gained another $357 billion during Q4 to a record $5.671 TN. Debt Securities were up $1.236 TN, or 27.9%, during 2023, with three-year growth of $1.621 TN, or 40.0%.

But it’s not just inflating securities prices fueling unprecedented Household Net Worth. Holdings of money-like instruments continue their unmatched ascent. Treasury and Agency holdings jumped another $202 billion during the quarter. Total Deposits gained $154 billion (largest gain in six quarters), while Money Funds deposits added another $117 billion. In total, Household holdings of Treasuries, Agencies, Deposits, and Money Funds (TAD&M) jumped $473 billion during the quarter to a record $21.579 TN, with a 2023 gain of $1.160 TN. TAD&M holdings inflated $5.881 TN, or 37.5%, during just the past four years.

The Household Balance Sheet is a key Bubble manifestation, a major factor behind resilient consumer spending. The Rest of World (ROW) balance sheet is also a key facet of Bubble analysis.

ROW holdings of U.S. Financial Assets inflated a quarterly record $4.089 TN during Q4 to a record $48.974 TN. Holdings surged an annual record $7.501 TN during 2023. Market gains drove a $1.452 TN Q4 rise in ROW Equities holdings. Debt Securities holdings jumped $863 billion during Q4 to a record $13.910 TN. For the quarter, Treasuries gained $413 billion (to $8.018 TN), Agencies $104 billion (to $1.429 TN), and Corporate Bonds $338 billion (to $4.165 TN).

ROW has evolved into a prominent Repo market operator. ROW Repo liabilities jumped $113 billion during Q4 to a record $1.689 TN, with one-year growth of $528 billion, or 45.5%. Repo Assets gained $77 billion during Q4 to a record $1.759 TN, with 2023 growth of $343 billion, or 24.2%. It’s worth noting that ROW Repo operations also expanded rapidly during the mortgage finance Bubble period, where foreign financial institutions aggressively leveraged higher yielding mortgage securities and derivatives.

Chair Powell: “Interest rates right now are well into restrictive territory. They are well above neutral… We’ve said for some years that we would start restoring the federal funds rate to a more normal, almost neutral level. We’re far from neutral now.”

March 8 – Bloomberg (Alexandra Harris): “Federal Reserve Bank of New York President John Williams said… the neutral rate of interest still ‘seems quite low.’ Speaking… at the London School of Economics, Williams said it’s not yet clear whether the neutral rate has moved up since the pandemic, though he said factors such as changing demographics and higher productivity may have an effect. He also emphasized the importance of using economic models to guide policy decisions… ‘Models are the way we communicate,’ Williams said. ‘If models are no good then the economists haven’t gotten it right.’”

Economic data, including February’s 275,000 job gains, do not suggest a restrictive policy rate. Booming markets certainly don’t. And neither does the Fed’s Q4 Z.1 report. In fact, Z.1 data are consistent with market indicators. There is a dislocation within the Credit system that has generated self-reinforcing liquidity excess. I believe key sources of liquidity creation originate from a combination of domestic speculative leverage (i.e., repo borrowings intermediated through the money fund complex) coupled with foreign-sourced leveraged speculation (i.e., yen and off-shore “carry trades”).

Perhaps the Fed focuses on reduced growth in household and corporate borrowings, while disregarding the paramount issue: ongoing booms in repo, money fund, broker/dealer, and ROW holdings. Resulting extraordinary liquidity excesses are fueling late-cycle speculative melt-up dynamics in equities, corporate Credit, crypto and the like.

The ongoing “neutral rate” debate is a policy dead-end. I’ll try boiling down complex analysis to a relatively simple proposition: The so-called “neutral rate” these days oscillates with the unstable market environment. “Risk on” requires a relatively high rate; “risk off” a much lower rate. And as we’re witnessing, late-cycle blow-off excesses turn largely impervious to conventional policy “tightening.” The Fed is clearly averse to tightening market financial conditions, a policy bias that stokes speculation, leveraging, and other “Terminal Phase” excesses.

A brief response to John Williams’ comment on economic models. Good luck modeling speculative market dynamics, financial innovation, and contemporary Credit more generally. And without an overarching emphasis on today’s dynamic financial system, econometric models will be deficient much of the time and of significant negative value at financial and economic critical junctures.

It’s interesting. Powell and Fed officials seem hellbent on cutting rates, irrespective of booming markets, liquidity overabundance, economic resilience, and ongoing elevated system Credit expansion. Powell was all over the subject of financial conditions when conditions were tightening. He now completely disregards exceptionally loose market financial conditions. The Fed is preparing to back away from its so-called “restrictive” rate policy in anticipation of weaker growth dynamics. Yet resulting loose conditions, inflating asset prices, and booming corporate debt issuance further increase the likelihood of overheating.

March 8 – Bloomberg (James Crombie): “There’s no sign of a letup. US companies are selling bonds like there’s no tomorrow and booming demand will keep the floodgates open. The first quarter will likely be the biggest ever for high-grade US bond sales, with spreads close to two-year tights, tiny new issue concessions and all-in funding costs only looking more attractive as Treasury yields fall. This week’s high-grade supply handily beat expectations, as it has done for the last few weeks, and the outlook is for more of the same. Year-to-date supply of $440 billion, up 30% compared to last year, puts borrowers on track to crack the $510 billion first-quarter record set in 2020. Junk and structured credit issuance is also ramping up. And despite lousy high-grade returns, cash just keeps pouring in, pursuing all-in yields that still seem enticing.”
 For the Week:

The S&P500 slipped 0.3% (up 7.4% y-t-d), and the Dow fell 0.9% (up 2.7%). The Utilities jumped 3.3% (up 0.2%). The Banks rose 3.0% (up 3.3%), and the Broker/Dealers added 1.9% (up 5.5%). The Transports dipped 0.7% (down 1.1%). The S&P 400 Midcaps gained 1.4% (up 6.1%), and the small cap Russell 2000 added 0.3% (up 2.7%). The Nasdaq100 fell 1.6% (up 7.1%). The Semiconductors gained 0.6% (up 18.7%). The Biotechs increased 0.2% (down 1.7%). With bullion surging $96, the HUI gold index rallied 8.5% (down 6.0%).

Three-month Treasury bill rates ended the week at 5.225%. Two-year government yields declined six bps this week to 4.47% (up 22bps y-t-d). Five-year T-note yields dropped 11 bps to 4.05% (up 20bps). Ten-year Treasury yields fell 10 bps to 4.08% (up 20bps). Long bond yields declined seven bps to 4.25% (up 23bps). Benchmark Fannie Mae MBS yields sank 21 bps to 5.50% (up 23bps).

Italian yields sank 31 bps to 3.58% (down 12bps y-t-d). Greek 10-year yields fell 21 bps to 3.27% (up 22bps). Spain’s 10-year yields dropped 23 bps to 3.08% (up 9bps). German bund yields fell 15 bps to 2.27% (up 24bps). French yields dropped 18 bps to 2.72% (up 16bps). The French to German 10-year bond spread narrowed three to 45 bps. U.K. 10-year gilt yields fell 14 bps to 3.98% (up 44bps). U.K.’s FTSE equities index slipped 0.3% (down 1.0% y-t-d).

Japan’s Nikkei Equities Index dipped 0.6% (up 18.6% y-t-d). Japanese 10-year “JGB” yields increased two bps to 0.74% (up 12bps y-t-d). France’s CAC40 gained 1.2% (up 6.4%). The German DAX equities index added 0.4% (up 6.3%). Spain’s IBEX 35 equities index jumped 2.4% (up 2.0%). Italy’s FTSE MIB index gained 1.2% (up 10.1%). EM equities were mixed. Brazil’s Bovespa index fell 1.6% (down 5.3%), and Mexico’s Bolsa index lost 1.1% (down 4.3%). South Korea’s Kospi index rallied 1.4% (up 0.9%). India’s Sensex equities index increased 0.5% (up 2.6%). China’s Shanghai Exchange Index gained 0.6% (up 2.4%). Turkey’s Borsa Istanbul National 100 index added 0.6% (up 22.6%). Russia’s MICEX equities index rose 1.5% (up 7.0%).

Federal Reserve Credit declined $38.4bn last week to $7.501 TN. Fed Credit was down $1.388 TN from the June 22nd, 2022, peak. Over the past 234 weeks, Fed Credit expanded $3.775 TN, or 101%. Fed Credit inflated $4.690 TN, or 167%, over the past 591 weeks.

Total money market fund assets rose $18.7bn to a record $6.077 TN. Money funds were up $1.257 TN, or 26.1%, y-o-y.

Total Commercial Paper declined $11.2bn to $1.266 TN. CP was up $88bn, or 7.4%, over the past year.

Freddie Mac 30-year fixed mortgage rates fell six bps to 6.88% (up 17bps y-o-y). Fifteen-year rates declined four bps to 6.22% (up 13bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down 13 bps 7.19% (up 17bps).

Currency Watch:

March 5 – Reuters (Summer Zhen and Samuel Shen): “Chinese money is pouring into funds invested in offshore assets at breakneck speed, butting up against outbound investment limits and complicating Beijing’s efforts to revive domestic markets and stabilise the yuan. The rush to invest offshore reflects low confidence at home and is evident in sales of funds issued under the Qualified Domestic Institutional Investor (QDII) programme, a key outbound investment channel that allows Chinese to buy overseas securities under Beijing’s strict capital controls. QDII fund units sold in January jumped 50% year-on-year to a record high…”

For the week, the U.S. Dollar Index declined 1.1% to 102.71 (up 1.4% y-t-d). For the week on the upside, the Japanese yen increased 2.1%, the South African rand 2.0%, the British pound 1.6%, the Australian dollar 1.5%, the Mexican peso 1.2%, the New Zealand dollar 1.2%, the Swedish krona 1.1%, the Singapore dollar 1.0%, the Norwegian krone 1.0%, the euro 0.9%, the South Korean won 0.9%, the Swiss franc 0.7% and the Canadian dollar 0.6%. On the downside, the Brazilian real declined 0.6%. The Chinese (onshore) renminbi increased 0.13% versus the dollar (down 1.21% y-t-d).

Commodities Watch:

March 7 – Bloomberg (Sybilla Gross): “China’s central bank added gold to its reserves for a 16th straight month in February, extending a long buying spree that’s helped to support the precious metal’s surge to a record high. Bullion held by the People’s Bank of China rose by about 390,000 troy ounces last month… That takes total holdings to 72.58 million troy ounces, equivalent to about 2,257 tons… Central banks bought 1,037 tons of gold last year, just shy of the all-time high of 2022, according to the World Gold Council. There’s a strong case for record buying by countries including China and Poland this year, the council said in January.”

March 3 – Reuters (Maha El Dahan and Alex Lawler): “OPEC+ members led by Saudi Arabia and Russia agreed… to extend voluntary oil output cuts of 2.2 million barrels per day into the second quarter, giving extra support to the market amid concerns over global growth and rising output outside the group. Saudi Arabia… said it would extend its voluntary cut of 1 million barrels per day (bpd) through the end of June, leaving its output at around 9 million bpd.”

The Bloomberg Commodities Index increased 0.8% (down 0.7% y-t-d). Spot Gold jumped 4.6% to $2,179 (up 5.6%). Silver surged 5.1% to $24.31 (up 2.2%). WTI crude declined $1.96, or 2.5%, to $78.01 (up 9%). Gasoline fell 3.3% (up 20%), and Natural Gas declined 1.6% to $1.81 (down 28%). Copper gained 0.8% (unchanged). Wheat sank 5.9% (down 16%), while Corn jumped 3.4% (down 10%). Bitcoin surged $6,300, or 10.1%, to $68,560 (up 61%).

Middle East War Watch:

March 7 – Reuters (Emily Rose and Ari Rabinovitch): “Israel will push on with its offensive against Hamas, including into the southern Gaza city of Rafah, despite growing international pressure to stop, Prime Minister Benjamin Netanyahu said on Thursday… ‘There is international pressure and it’s growing, but particularly when the international pressure rises, we must close ranks, we need to stand together against the attempts to stop the war,’ he said.”

March 7 – Reuters (Nidal Al-Mughrabi): “Hamas on Thursday left Gaza ceasefire talks in Cairo where there was no sign of progress just days before the start of Ramadan, while the U.S. said the onus was on the Palestinian militant group to strike a deal on Israeli hostages. Israel and Hamas blamed each other for the lack of agreement after four days of talks mediated by Qatar and Egypt about a 40-day ceasefire amid fears violence could escalate during the Muslim fasting month.”

March 5 – Reuters (James Mackenzie): “Israeli defence minister Yoav Gallant said… the continuing tension with Iran-backed Hezbollah at the border with Lebanon was moving the situation nearer to a military escalation. Israel and Hezbollah have been trading fire since the Palestinian group Hamas attacked Israel on Oct. 7, fuelling concern about the danger of all-out war… ‘We are committed to the diplomatic process, however Hezbollah’s aggression is bringing us closer to a critical point in the decision-making regarding our military activities in Lebanon,’ Gallant said…”

March 7 – Associated Press (Jon Gambrell): “The first fatal attack by Yemen’s Houthi rebels on shipping threatens to further sever a crucial maritime artery for global trade and carries with it risks beyond those just at sea. Already, the White House is warning that there will be a response to Wednesday’s attack on the Barbados-flagged, Liberian-owned bulk carrier True Confidence in the Gulf of Aden. What that will look like remains unclear, but the U.S. has already launched round after round of airstrikes targeting the Houthis, a rebel group that has held Yemen’s capital since 2014, and more are likely on the way.”

March 2 – Reuters (Nidal Al-Mughrabi and Idrees Ali): “The United States on Saturday carried out the first of what it said would be a series of humanitarian airdrops of food into Gaza, as aid agencies warned of a growing humanitarian disaster in the Palestinian enclave in the absence of a ceasefire deal. Three C-130 U.S. military planes delivered more than 38,000 meals into a territory where the United Nations says at least 576,000 people are one step away from famine conditions.”

March 3 – Reuters (Mohamed Ghobari): “Yemen’s Iran-backed Houthis vowed on Sunday to continue targeting British ships in the Gulf of Aden following the sinking of UK-owned vessel Rubymar. The U.S. military confirmed on Saturday that the UK-owned vessel Rubymar had sunk… ‘Yemen will continue to sink more British ships, and any repercussions or other damages will be added to Britain’s bill,’ Hussein al-Ezzi, deputy foreign minister in the Houthi-led government, said…”

March 5 – Financial Times (Robert Wright): “When Yemen’s Houthi rebels attacked a ship carrying 21,000 tonnes of fertiliser from Saudi Arabia to Bulgaria last month, they had a simple justification: they said the Rubymar was a ‘British ship’. But the Rubymar, which sank on Saturday, flew the flag of Belize, was partly managed by a Beirut-based ship management company, was on a voyage organised by another Lebanese operator and had a mostly Syrian crew. Its only clear link to the UK is that maritime databases give a flat in Southampton, England… as the address for the ship’s owner. However, that owner is a company called Golden Adventure registered in the Marshall Islands in the Pacific.”

Ukraine War Watch:

March 4 – Reuters (Andrew Osborn): “Dmitry Medvedev, deputy chairman of Russia’s Security Council and an ally of President Vladimir Putin, described Ukraine… as part of Russia and said what he called historical parts of Russia needed to ‘come home.’ In a bellicose presentation that suggested Russia’s military goals in Ukraine are far-reaching, Medvedev… praised the Russian Empire and the Soviet Union and said Moscow would prosecute its ‘special military operation’ until the Ukrainian leadership capitulated. ‘One of Ukraine’s former leaders said at some point that Ukraine is not Russia,’ Medvedev… told a youth forum… ‘That concept needs to disappear forever. Ukraine is definitely Russia,’ he said to applause. ‘Historic parts of the country need to come home.’”

March 6 – Reuters: “A senior Russian military officer has warned that the conflict in Ukraine could escalate into a full-scale war in Europe and said the probability of Moscow’s forces becoming involved in a new conflict is increasing ‘significantly.’ Colonel-General Vladimir Zarudnitsky, head of the Russian army’s Military Academy of the General Staff, made the comments in an article for ‘Military Thought’, a defence ministry publication… ‘The possibility of an escalation of the conflict in Ukraine – from the expansion of participants in ‘proxy forces’ used for military confrontation with Russia to a large-scale war in Europe – cannot be ruled out… The main source of military threats to our state is the anti-Russian policy of the United States and its allies, who are conducting a new type of hybrid warfare in order to weaken Russia in every possible way, limit its sovereignty and destroy its territorial integrity.’”

March 4 – Financial Times (Guy Chazan and Max Seddon): “Germany has rejected a claim by Moscow that it is planning attacks on Russian territory, calling it ‘absurd propaganda’. Russia made the claim after Kremlin-controlled media published a recording in which senior German air force personnel appeared to discuss how the country’s long-range Taurus missiles could be used by Kyiv against Russian forces… The intercept has caused a political storm in Germany, raising deep concern about the security of government communications. It has also reignited a row over whether Berlin should give Tauruses to Kyiv…”

Taiwan Watch:

March 6 – Reuters (Yimou Lee): “China has stepped up grey-zone warfare against Taiwan, aiming to make the areas around the democratic island ‘saturated’ with balloons, drones and civilian boats, a Taiwan defence ministry report said… Taiwan… has complained in recent years that China has been using so-called grey-zone warfare, which wields irregular tactics to exhaust a foe without resorting to open combat. In a report sent to parliament, a copy of which was reviewed by Reuters, the ministry said Beijing has launched ‘multi-front saturated grey-zone’ tactics to harass Taiwan, including increased patrols of ships and planes.”

Market Instability Watch:

March 3 – Financial Times (Kate Duguid, Nikou Asgari and Costas Mourselas): “One of Bill Clinton’s top advisers memorably said that he would like to be reincarnated as the bond market ‘because you can intimidate everyone’. But in recent years, the most powerful fixed-income market of all has been scaring its own regulators. The $26.5tn US Treasury market is the biggest and most liquid in the world and Treasury securities are held by investors and central banks across the globe. The market is the mechanism by which the Federal Reserve executes monetary policy and through which the US government borrows. Yields on Treasuries are the risk-free rate against which assets around the world are priced. But growing problems could threaten the asset’s supremacy in the financial world. On three occasions in the past decade, crises have precipitated a dysfunction in the market. The 2019 repo crisis and the March 2020 market meltdown required emergency intervention from the Federal Reserve and the New York Fed.”

Bank Watch:

March 6 – Reuters (Niket Nishant, Manya Saini and Anirban Sen): “New York Community Bancorp said… it had raised $1 billion from investors including former U.S. Treasury Secretary Steven Mnuchin’s Liberty Strategic Capital and named a former Comptroller of the Currency its new CEO. Investment firms Hudson Bay Capital, Reverence Capital Partners, Citadel Global Equities, other institutional investors and certain members of the bank’s management also participated in the equity investment, according to NYCB. The bank’s stock had a rollercoaster session, falling 45% prior to the announcement, bouncing 30% higher after finally closed 7.4% higher.”

March 7 – New York Times (Andrew Ross Sorkin, Ravi Mattu, Bernhard Warner, Sarah Kessler, Michael J. de la Merced, Lauren Hirsch, Ephrat Livni and Benjamin Mullin): “For months, Wall Street C.E.O.s have been complaining bitterly and lobbying against the prospect of higher capital requirements, which would require them to keep more money on hand and would lower their profits. It appears they have scored a big win. Jay Powell dropped the bombshell in his testimony before the House… Markets were still digesting the Fed chair’s go-slow comments on interest rate cuts when he signaled that proposed new rules to force lenders to beef up their books would be scaled back, or reworked. ‘I do expect that there will be broad and material changes to the proposal,’ he said. The capital rules, known as the ‘Basel III Endgame,’ would apply to the largest banks. They would have to set aside a bigger emergency cushion to soak up losses stemming from shocks like the bank run last year that led to the collapse of Silicon Valley Bank and prompted a wider crisis.”

March 7 – Financial Times (Joshua Franklin, Stephen Gandel and Brooke Masters): “The number of problem banks in the US has jumped 18%, regulators warned, as New York Community Bank was stabilised by a $1bn capital raise led by former US Treasury secretary Steven Mnuchin. Twelve months after the failure of Silicon Valley Bank shook the regional banking sector, NYCB’s recent struggles have underscored the continuing fragility at some US lenders. The Federal Deposit Insurance Corporation… said the number of weak US banks had risen by eight to 52 in the final three months of 2023, the biggest jump since the demise of SVB.”

March 4 – Wall Street Journal (Telis Demos): “Recent regional banking crises have revived debates about the size of banks. Larger banks have been more insulated from some of the pressures hitting their smaller peers, such as deposit outflows and heavy concentrations in commercial-real estate lending. This suggests that letting banks get bigger might be a pathway to stability—though one that critics would charge shifts the burden to taxpayers to backstop more ‘too big to fail’ behemoths, or would concentrate banking in a way that hurts customers. Another problem: Getting to bigger banks means growing smaller- and medium-size banks. And what we are seeing is that this process can be fraught with risk.”

March 5 – Bloomberg (Tommy Wilkes): “Major European banks have been cutting their lending to commercial property and have half the exposure of their U.S. peers, making U.S. lenders more vulnerable as office prices plunge further, Morgan Stanley said… Commercial real estate (CRE) markets are in the grip of the biggest downturn since the 2008-9 financial crisis as higher borrowing costs and a spike in vacancy rates driven by more people working from home hit demand for office space. Morgan Stanley analysts said in a research note that regional U.S. banks looked most exposed, alongside German regional lenders – which unlike bigger European banks had been increasing their exposure.”

March 7 – Reuters (Tom Sims): “The credit rating agency Moody’s said… it was downgrading its outlook for the banking sector in a number of European countries as weak economies erode profits. It changed the outlook to negative from stable for the banking sectors of Germany, Britain, France, Belgium, the Netherlands and Sweden. Rising losses for unpaid loans and higher funding costs will chip away at profits, Moody’s said.”

Global Credit Bubble Watch:

March 6 – Bloomberg (Caleb Mutua): “A healthy pipeline of potential deals to fund mergers and acquisitions and a primary market that’s looking ‘quite attractive’ for borrowers will fuel an already record-setting issuance spree, contrary to expectations that sales will slow in March, according to JPMorgan… Issuance in the US investment-grade market is up nearly 40% to $429.2 billion this year through Tuesday after a record January and February…”

March 8 – Bloomberg (Olivia Raimonde and Ronan Martin): “The most punishing interest-rate hikes since the 1980s… Yet another US lender hitting trouble barely a year after debt markets were upended by the collapse of one of the world’s biggest banks. Credit investors have shrugged all of this off and are acting like the go-go days of the easy money era are back again. Driven by a wall of new cash and a belief that the US Federal Reserve has served up a soft economic landing, normally sober debt investors are joining the ‘everything boom’ that’s sent stocks and Bitcoin to giddy heights… In credit, a risk-taking ebullience has taken hold. The lowest-rated traded company debt is outgunning safer assets: Spreads between junk bond yields and investment-grade counterparts are tight. Loan prices are high as demand soars. Negative-yielding bonds are back. And whether Fed Chair Jay Powell wants it or not, it’s getting easier for companies of all stripes to snag funding.”

March 4 – Bloomberg (Lisa Lee): “Wall Street bankers looking to raise fresh financing for multi-billion dollar buyouts are getting a boost from the record start to the year from a critical part of the leveraged loan universe. Sales of collateralized loan obligations stand at $32.7 billion in the US so far, surpassing the previous high of $24.6 billion in 2021, according to Bank of America… In Europe, CLO issuance has also reached a historically fast pace, with $5.5bn… The surge in demand, following a dismal 2023, should buoy banks competing with private credit to underwrite the trickle of merger and acquisition financing deals. That’s because slices of the leveraged loans they sell to support those buyouts also get packaged into the CLOs.”

March 4 – Reuters (Matt Tracy): “Defaults among U.S. corporate junk debt issuers reached a post-pandemic high in February, JPMorgan said… Nine junk-rated borrowers either filed for Chapter 11 bankruptcy or missed their interest payments on a total of $5.97 billion in loans and bonds last month, JPMorgan noted. Three other companies opted for a distressed exchange on a total $3.96 billion in loans and bonds, the report added… Last month’s $9.9 billion in combined defaults and distressed exchanges surpassed 2023’s monthly average of $7.2 billion, JPMorgan said. It was the highest combined volume of the two since $16.9 billion posted in April 2023.”

March 5 – Bloomberg (John Sage): “Private credit’s ‘golden era’ may face strain amid a resurgence in the broadly syndicated loan market, as increased competition drives down returns, according to a report from Moody’s… As banks compete harder to win big deals, recent private credit loans have priced at some of the tightest spreads on record… ‘As rate hikes level and competition escalates, this will put pressure on private credit returns, including the generous illiquidity premiums that direct lenders wield over syndicated lenders in public markets. All of this will drive greater convergence in terms and pricing between banks and nonbanks,’ analysts led by Christina Padgett wrote…”

March 6 – Bloomberg (Amanda Albright and Danielle Moran): “Harvard University — armed with a AAA credit rating and $50 billion endowment — sold $750 million in taxable bonds this week as buyers shrugged off recent controversies swirling around the school. The debt priced at 47 bps above similar-maturity Treasuries, compared to earlier price talk of 60 bps. That’s one of the tightest spread of any 11-year investment-grade bond dating back to at least 2009…”

AI Bubble Watch:

March 7 – Bloomberg (Jan-Patrick Barnert): “Options trading in semiconductor stocks is exploding as investors bet on the hottest thing in equity markets these days: artificial intelligence. Daily average notional volume in single stock puts and calls for members of the Philadelphia Semiconductor Index exceeded $145 billion in February. That’s about double the average at the end of 2023 and seven times higher than a year earlier. Nvidia Corp., the chip maker at the heart of the AI bull market, accounted for almost four-fifths of the trades. Last year, Nvidia’s market value soared by almost 240%. It’s up 85% in 2024, pulling the semiconductor index up by more than 23%.”

March 8 – Reuters (Alun John): “Investors dumped technology stocks at the fastest rate on record and continued to pour money into investment grade bonds and cash equivalents in the week to Wednesday, Bank of America said… Tech stocks saw $4.4 billion of outflows in the latest week, their ‘largest outflow ever’ and the first outflow in nine weeks, BofA said…”

Bubble and Mania Watch:

March 5 – Bloomberg (Alexandra Semenova): “The sharp rally in US stocks this year has left strategists at JPMorgan… and Goldman Sachs… divided about whether a market bubble is forming. To JPMorgan’s chief market strategist Marko Kolanovic, the dramatic rally in US equities and Bitcoin’s quick surge above the $60,000 mark signal yes. He sees those advances as indicative of accumulating froth in the market… He joins in a chorus of rapidly piling up warnings from Wall Street that are hearkening back to the dot-com boom of the late-1990s, or the post-pandemic mania of 2021, when stock prices quickly ballooned and then burst. Meanwhile, David Kostin at Goldman Sachs is among those who thinks the risk-on mood is warranted, arguing Big Tech’s lofty valuations are supported by fundamentals.”

March 7 – Reuters (Kanchana Chakravarty, Roshan Abraham and Sruthi Shankar): “Goldman Sachs expects U.S. share buybacks to exceed $1 trillion for the first time in 2025, driven by strong earnings growth from technology companies and looser financial conditions as the Federal Reserve looks to cut interest rates. The Wall Street bank… said it expects 16% growth in share repurchases from S&P 500, opens new tab companies to $1.08 trillion in 2025, following a 13% rise to $925 billion in 2024.”

March 5 – Wall Street Journal (Ben Otto): “Shipments by Tesla and other electric vehicle makers tumbled in China in February… The U.S. electric vehicle maker shipped 60,365 China-made vehicles during the month, its lowest monthly reading since late 2022… BYD, the Chinese automaker that overtook Tesla as the world’s top seller of electric vehicles last quarter, saw its sales fall to 121,748 vehicles in February from 201,493 a month earlier… Across the industry, total EV sales fell 9% on year—and 34% on-month—to about 450,000 units in February, the CPCA said.”

U.S./Russia/China/Europe Watch:

March 5 – Reuters (Yew Lun Tian and Laurie Chen): “China will boost its defence spending by 7.2% this year, fuelling a military budget that has more than doubled under President Xi Jinping’s 11 years in office as Beijing hardens its stance on Taiwan… China also officially adopted tougher language against Taiwan as it released the budget figures, dropping the mention of ‘peaceful reunification’ in a government report delivered by Premier Li Qiang at the opening of the National People’s Congress (NPC), China’s rubber-stamp parliament…”

March 7 – Wall Street Journal (Brian Spegele and Austin Ramzy): “China’s foreign minister painted the U.S. as a paranoid superpower and criticized Europe’s policy toward Beijing as increasingly muddled, comments that laid bare how deep distrust persists between China and the West despite a surge of diplomacy to stabilize ties… Foreign Minister Wang Yi also warned of the possible escalation in the war between Russia and Ukraine, celebrated the close ties between Beijing and Moscow and echoed recent comments by Russian President Vladimir Putin about the risk of a protracted conflict. Wang… saved his sharpest barbs for the U.S. After acknowledging ‘some progress’ in improving U.S.-China ties since the November summit between President Biden and Chinese leader Xi Jinping in California, Wang said the U.S. was still failing to keep its promises.”

March 4 – Wall Street Journal (Clarence Leong and Liza Lin): “Two years after the invasion of Ukraine, drones and U.S.-made computer chips are increasingly flowing to Russia from China through Central Asian trade routes, showing the difficulty of strangling supplies to Moscow’s war effort. Trade routes snaking through former Soviet republics Kazakhstan and Kyrgyzstan are among the many paths into Russia for so-called dual-use goods… Despite their efforts, Central Asia is a growing pipeline for Russia, made possible by thousands of miles of open borders, opaque trade practices and opportunistic middlemen. The goods often originate in China, where they are manufactured in some cases by major U.S. companies, which say the items are being imported by Russia without their permission.”

March 5 – Reuters: “Russia and China are considering putting a nuclear power plant on the moon from 2033-35, Yuri Borisov, the head of Russia’s space agency Roscosmos said… Borisov, a former deputy defence minister, said that Russia and China had been jointly working on a lunar programme and that Moscow was able to contribute with its expertise on ‘nuclear space energy’. ‘Today we are seriously considering a project – somewhere at the turn of 2033-2035 – to deliver and install a power unit on the lunar surface together with our Chinese colleagues,’ Borisov said.”

De-globalization and Iron Curtain Watch:

March 5 – Reuters (Yelin Mo and Brenda Goh): “Apple’s iPhone sales in China fell 24% year-on-year in the first six weeks of 2024, according to research firm Counterpoint, as the U.S. company faced increased competition from domestic rivals such as Huawei. The U.S. tech giant’s chief competitor in China in premium smartphones, Huawei, saw unit sales rise by 64% in the period…”

March 7 – Wall Street Journal (Liza Lin): “For American tech companies in China, the writing is on the wall. It’s also on paper, in Document 79. The 2022 Chinese government directive expands a drive that is muscling U.S. technology out of the country—an effort some refer to as ‘Delete A,’ for Delete America. Document 79 was so sensitive that high-ranking officials and executives were only shown the order and weren’t allowed to make copies, people familiar with the matter said. It requires state-owned companies in finance, energy and other sectors to replace foreign software in their IT systems by 2027.”

Inflation Watch:

March 4 – Financial Times (Aiden Reiter): “Services price inflation is likely to remain stubbornly strong this year and could cause central banks to delay interest rate cuts, according to the Bank for International Settlements. Prices in the services sector, which is labour-intensive and therefore more sensitive to movements in wages, are likely to remain high across advanced and emerging economies for longer than expected due to tight labour markets… If services prices increased further, the ‘possible slowdown of disinflation could prompt monetary policy to remain tighter for longer’, the report added. Persistent growth in services inflation has proven to be an obstacle to addressing the ‘last mile’ of inflation, as central bankers inch closer to an overall rate of price growth where they could begin making cuts.”

March 4 – Wall Street Journal (Heather Haddon and Ruth Simon): “A $16 bacon cheeseburger may not be enough to save your neighborhood bar and grill. Independent restaurants are on financial life support, owners say, squeezed between escalating payroll costs and diners’ dwindling tolerance for ever-higher checks. Wages for waitstaff, table bussers and line cooks will grow more expensive for many eateries this year, with 22 states in January raising the minimum wage for hourly workers… In January, 59% of small-business owners reported higher labor costs were their biggest source of inflation, according to a survey of more than 425 entrepreneurs conducted… by Vistage Worldwide…”

March 3 – Wall Street Journal (Jason Douglas): “In the late 1990s and early 2000s, the U.S. and the global economy experienced a ‘China shock,’ a boom in imports of cheap Chinese-made goods that helped keep inflation low but at the cost of local manufacturing jobs. A sequel might be in the making as Beijing doubles down on exports to revive the country’s growth. Its factories are churning out more cars, machinery and consumer electronics than its domestic economy can absorb. Propped up by cheap, state-directed loans, Chinese companies are glutting foreign markets with products they can’t sell at home.”

Federal Reserve Watch:

March 6 – Bloomberg (Denitsa Tsekova): “Ever since the Federal Reserve began its policy-tightening campaign, Jerome Powell has been happy to ignore one form of inflation: Rising asset prices. Now as the Fed chair gears up for his congressional testimony on Capitol Hill, Wall Street is starting to wonder just how long Powell’s hands-off approach can last against the backdrop of sizzling markets. With tech stocks hitting relentless records of late, a Goldman Sachs… measure of financial conditions has eased at one of the fastest clips in four decades. Ever-volatile Bitcoin touched new heights at one point Tuesday as the meme-coin crowd roars back to life. On economic growth, even Nouriel ‘Dr. Doom’ Roubini is sounding, well, bullish.”

March 4 – Reuters (Howard Schneider): “The U.S. Federal Reserve is under no urgent pressure to cut interest rates given a ‘prospering’ economy and job market, Atlanta Fed President Raphael Bostic said in remarks that highlighted the risk inflation may get stuck above the central bank’s 2% target or be sent even higher by ‘pent-up exuberance.’ Bostic said he still thinks it will likely be appropriate for the Fed to approve two quarter-point rate cuts by the end of this year. But he also said the Fed was walking a ‘fine line’ to be sure that current economic strength does not evolve into ‘froth’ and a new round of inflation.”

U.S. Bubble Watch:

March 8 – Associated Press (Paul Wiseman): “America’s employers delivered another healthy month of hiring in February, adding a surprising 275,000 jobs and again showcasing the U.S. economy’s resilience in the face of high interest rates. Last month’s job growth marked an increase from a revised gain of 229,000 jobs in January. At the same time, the unemployment rate ticked up two-tenths of a point in February to 3.9%… And it marked the 25th straight month in which joblessness has remained below 4% — the longest such streak since the 1960s… Average hourly wages rose just 0.1% from January, the smallest monthly gain in more than two years, and 4.3% from a year earlier, less than expected.”

March 6 – CNBC (Jeff Cox): “Private sector job growth improved during February though growth was slightly less than expected, payrolls processing firm ADP reported… Companies added 140,000 positions for the month, an increase from the upwardly revised 111,000 in January… Job gains came across multiple areas, led by leisure and hospitality with 41,000 and construction, which added 28,000 positions. Other industries showing solid gains included trade, transportation and utilities (24,000), finance (17,000), and the other services category (14,000). Of the total, 110,000 came from the services sector while goods producers added 30,000.”

March 7 – Reuters (Amina Niasse): “U.S. layoff announcements rose 3% last month to the highest level in 11 months as automation-related restructuring continues to take a toll… Job cut announcements reached 84,638 in February – the highest since last March – from 82,307 in January, outplacement firm Challenger, Gray & Christmas said. It was the highest total for the month of February since 2009, although on a year-to-date basis cuts so far in 2024 are down 7.6% from the same period last year… While the tech sector leads all industries in job cuts so far this year, cuts are still down by 55% year to date compared with the same period in 2023.”

March 5 – Reuters (Lucia Mutikani): “U.S. services industry growth slowed a bit in February amid a decline in employment, but a measure of new orders increased to a six-month high, pointing to underlying strength in the sector. Despite the weakness in employment, comments from services businesses in the Institute for Supply Management (ISM) survey on Tuesday were generally upbeat, and suggested labor shortages remained a constraint for some… The ISM said its non-manufacturing PMI slipped to 52.6 last month from 53.4 in January… Fourteen services industries reported growth last month, including construction, retail trade, and public administration, as well as utilities and wholesale trade.”

March 7 – Bloomberg (Christopher Condon): “US consumer borrowing in January exceeded forecast as non-revolving credit climbed the most in seven months. Total credit rose $19.5 billion after a revised $919 million gain in December, according to Federal Reserve data… Total credit outstanding hit a record $5.04 trillion. Non-revolving credit, such as loans for vehicle purchases and school tuition, increased $11.1 billion. Revolving credit, which includes credit cards, climbed $8.4 billion in January.”

March 6 – CNBC (Diana Olick): “Spring hasn’t officially sprung yet, but the spring housing market already appears to be on the move despite stubbornly higher mortgage rates. Mortgage applications to purchase a home increased 11% last week compared with the previous week… Demand was still 8% lower than the same week one year ago… There were 14.8% more homes actively for sale in February compared with the same time last year, according to Realtor.com. Notably, homes priced in the $200,000 to $350,000 range grew by 25% from a year ago…”

March 7 – Reuters (Amina Niasse): “U.S. homebuying sentiment rose for a third consecutive month in February largely because a growing view among current homeowners that now is a good time to sell their house could bode well for a much-needed uptick in home listings. Fannie Mae’s Home Purchase Sentiment Index increased by 2.1 points in February to 72.8 from 70.7 in January… On a year-over-year basis, it rose by more than 25%.”

March 6 – Reuters (Lindsay Dunsmuir): “There was an uptick in U.S. economic activity from early January through late February while inflation and the jobs market presented conflicting signals on how quickly they will cool further, a U.S. Federal Reserve survey showed…, underscoring the complicated picture for central bankers as they seek to fully tame pricing pressures… ‘Economic activity increased slightly, on balance,’ the Fed said…, known as the ‘Beige Book,’ which polled business contacts across the central bank’s 12 districts through Feb. 26. “The outlook for future economic growth remained generally positive, with contacts noting expectations for stronger demand and less restrictive financial conditions over the next 6 to 12 months.”

March 7 – Bloomberg (Michael Sasso): “Small businesses in the US remained upbeat in their outlook for 2024 despite elevated debt burdens and high borrowing rates that limited their access to new credit, a new Federal Reserve survey showed. The Fed’s 12 regional banks… released their credit conditions survey of more than 6,000 firms with fewer than 500 employees. Overall, expectations were fairly positive for the remainder of the year, with 57% foreseeing a bump up in revenue and only 19% expecting a drop, according to the annual Small Business Credit Survey conducted last fall. A large minority, 39%, expected to increase employment this year, against 11% who anticipated a reduction. Half of employers said their job count would stay flat. Small business expectations for growth generally tracked increasingly optimistic forecasts.”

March 5 – Bloomberg (Ben Holland): “US households are now paying roughly as much interest on other kinds of debt, from credit cards to student loans, as they are on their mortgages, according to… the Bureau of Economic Analysis. Non-mortgage interest payments climbed to an annual rate of $573.4 billion in January. That’s the highest on record even after adjusting for inflation — and within a hair’s breadth of the $578.3 billion in annual mortgage interest that households were shelling out as of the last quarter of 2023. The near-parity between the two series over recent months is unprecedented in data going back to the 1970s. For most of that period, interest payments on mortgages were about twice as large as other kinds.”

March 7 – Bloomberg (Mia Gindis): “New York’s private-sector workforce jumped to a record of 8.35 million jobs in January, marking the state’s full recovery from the coronavirus pandemic, Governor Kathy Hochul said. The state has added more than 1.9 million private-sector jobs since the height of the pandemic in 2020, when employment hit a 30-year low of 6.4 million… Private education, health care, leisure and hospitality drove the gains, the governor said. ‘Business is booming, New Yorkers are getting back to work, and thanks to a major economic relief package I announced in my first months in office, our communities are stronger and more vibrant than ever,’ Hochul said…”

China Watch:

March 6 – Financial Times (editorial board): “The maiden speech of Li Qiang, China’s premier, to the National People’s Congress this week felt like a blast from the country’s ideological past. He lavished paeans of praise upon his boss Xi Jinping… but failed to outline in detail how Beijing plans to combat multiple economic impediments… He was at pains in his hour-long address to make clear where the current power lies. The achievements of 2023, Li said, were thanks to Xi, ‘who is at the helm, charting the course, to the sound guidance of Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era’. The display of subservience came one day after Beijing scrapped a tradition that China’s premier gives a televised press conference at the close of the congress. Such signals, taken together, contribute to a sense that it is ideology more than generating prosperity that really animates Beijing. This cognitive shift is, in turn, driving a reorientation of international capital away from Chinese assets to seek returns in Japan, India, south-east Asia and other markets.”

March 6 – Wall Street Journal (Rebecca Feng): “China’s central government is ready to load up on debt to help the economy. Beijing is planning this year to issue $139 billion of ultralong special treasury bonds, a crisis management tool that will now become a regular source of funding, at least for the next few years. The move will take part of the burden for funding the country’s economic growth away from heavily indebted local governments, some of which are facing severe strain after years of heavy borrowing… The country’s local governments have long played a crucial role, allocating trillions of dollars of resources, greenlighting real-estate projects and new factories… But they have also loaded up on debt—creating a financial time bomb that China needs to defuse at the same time as encouraging growth. ‘The central government is taking over the role of local governments as the main body of fiscal leverage,’ wrote analysts at Fitch Bohua, a credit-rating company…”

March 6 – Bloomberg: “China’s top economic officials defended the nation’s plan to grow the economy by around 5% this year and hinted at a potential liquidity boost, one day after the ambitious target was met with skepticism… Pan Gongsheng, governor of the People’s Bank of China, said there’s still room to cut the reserve requirement ratio for banks, which would allow lenders to keep smaller reserves and therefore encourage lending. Zheng Shanjie, chairman of the National Development and Reform Commission, struck a confident tone on the country’s growth outlook, saying the GDP goal is a ‘positive target that can be attained through vigorous effort.’”

March 5 – Reuters (James Pomfret, Kevin Yao and Ellen Zhang): “Facing its deepest economic challenges in years, China’s leadership has tasked ministries and local governments with implementing a new mantra from President Xi Jinping: unleash ‘new productive forces’. In his annual report to China’s legislature…, Premier Li Qiang, Xi’s top deputy, vowed a ‘new leap forward’ by supporting developing sectors and industries including electric vehicles, new materials, commercial spaceflight, quantum technology and life sciences. The term ‘new productive forces’ was coined by Xi last September during a trip to a rustbelt city in northeast China…”

March 4 – Bloomberg: “China’s property debt crisis is showing new signs of trouble after entering its fourth year, with one of the country’s major state-backed developers placed under unprecedented scrutiny by investors. Some of China’s largest insurers are sounding an alarm over the debt risks of China Vanke Co., according to people familiar…, as shares and bonds of the major developer hit record lows on repayment concerns. At least two Beijing-based insurers that farm out annuity investments told their external portfolio managers late last week to closely monitor Vanke’s credit risks, said the people, asking not to be identified discussing a private matter. One life insurer also told its pension managers to curb exposure…”

March 6 – Bloomberg: “China Vanke Co. is facing deepening pressure as several major insurers seek to protect their privately issued debt on concerns over potential liquidity stress at the nation’s second-largest developer, according to people familiar…. At least three Beijing-based insurers sent executives to Vanke’s headquarters in Shenzhen this week to discuss debt repayment plans under the local government’s coordination… Options include extending the deadline for repayment by a year, adding collateral and issuing bonds, the people said.”

March 7 – Reuters (Joe Cash): “China’s export and import growth in the January-February period beat forecasts, suggesting global trade is turning a corner… China’s improved export data joins those of South Korea and Germany, and Taiwan, who all saw their shipments top expectations over the first two months of the year… Exports from the world’s second-biggest economy in the two months were 7.1% higher than a year before… Imports were up 3.5%…”

March 6 – Bloomberg: “China’s raw materials purchases surged in the first two months of the year, as importers took advantage of weaker prices for some commodities and prepared for more stimulus from Beijing to lift demand. Imports of most industrial commodities handily beat their levels of a year ago… Energy showed the most notable gains, including a 36% jump in refined oil products. Lower international prices for natural gas and coal saw imports climb by more than 20%. Crude oil shipments rose 5.1%.”

Global Bubble Watch:

March 5 – Reuters (Siddarth S): “Global deal-making volumes will rise by 50% this year compared to 2023 as fears over funding costs, inflation and recession concerns abate, Morgan Stanley said… ‘We think that this ‘winter’ for mergers and acquisitions (M&A) is thawing and activity is set to return cyclically and secularly,’ the… brokerage said. Morgan Stanley expects Europe and North American regions to benefit the most from deal-making activity, but also sees favorable M&A weather for India, Australia, South Korea, Japan and ASEAN (Association of Southeast Asian Nations) countries.”

Central Banker Watch:

March 7 – Financial Times (Martin Arnold): “The European Central Bank has signalled June is the earliest it is likely to cut interest rates after it lowered its forecasts for inflation, predicting it will reach its 2% target next year. The central bank maintained its benchmark deposit rate at an all-time high of 4%… But it lowered its inflation forecast for this year from 2.7% to 2.3%, and trimmed it for 2025, opening the door to possible rate cuts in the coming months. ‘We are making good progress towards our inflation target and we are more confident as a result,’ said ECB president Christine Lagarde. ‘But we are not sufficiently confident. We clearly need more evidence and more data. We will know a little more in April, but we will know a lot more in June.’”

Japan Watch:

March 4 – Reuters (Takahiko Wada and Leika Kihara): “Core inflation in Japan’s capital re-accelerated in February above the central bank’s target…, a sign conditions for ending negative interest rates were falling into place… The data will be among factors the Bank of Japan (BOJ) will scrutinise ahead of its policy-setting meeting on March 18-19 in judging whether to phase out its massive stimulus programme. Core consumer price index (CPI) in Tokyo, a leading indicator of nationwide figures, rose 2.5% in February from a year earlier, matching market forecasts…”

March 7 – Reuters (Erica Yokoyama and Yumi Teso): “Speculation surged that the Bank of Japan will move this month to raise interest rates for the first time since 2007, after a flurry of reports and wage figures helped drive up the yen, bond yields and overnight swaps. Bets on the March 18-19 meeting are gaining traction as reports emerge that some BOJ officials favor an early move while some government officials also support a rate hike.”

March 5 – Bloomberg (Toru Fujioka and Sumio Ito): “The Bank of Japan will probably need at least nine years to normalize its balance sheet in the earliest-case scenario after a massive monetary easing program that ran for more than a decade, according to a former executive director. The BOJ is widely expected to kick off its normalization process this month or in April by ditching the negative interest rate. After that move, the first hike since 2007, how quickly it plans to tackle its bloated balance sheet will be a key question for investors. As Yamamoto sees it, normalization would mean bringing the balance sheet back to a level where it’s just a little more than required reserves. The bank would have to shed ¥440 trillion ($2.9 trillion) of bonds from its portfolio to reach that point.”

Emerging Market Watch:

March 6 – Bloomberg (Mirette Magdy and Tarek El-Tablawy): “Egypt delivered its biggest-ever interest-rate hike and allowed its currency to weaken more than 38% in a long-awaited devaluation that may pave the way for billions more in loans from the International Monetary Fund… A dire shortage of foreign exchange has until now hammered businesses and caused the cost of imported goods to soar. The Israel-Hamas war has added to economic pressures. The devaluation may stoke inflation and hurt Egyptians in the short term.”

March 3 – Bloomberg (Marcus Wong and Matthew Burgess): “Central bank independence is becoming an increasingly key battleground in emerging markets, and one that bodes ill for currency and bond investors. The Thai baht has come under recurring pressure in recent weeks due to a standoff between the prime minister and policymakers over the timing of interest-rate cuts. Hungary’s forint neared a one-year low versus the euro this past week amid an ongoing clash between Prime Minister Viktor Orban and the country’s central bank chief. Brazil’s real and the Turkish lira have long been whipsawed by the two countries’ leaders calling for lower borrowing costs.”

Social, Political, Environmental, Cybersecurity Instability Watch:

March 7 – Washington Post (Evan Halper): “Vast swaths of the United States are at risk of running short of power as electricity-hungry data centers and clean-technology factories proliferate around the country, leaving utilities and regulators grasping for credible plans to expand the nation’s creaking power grid. In Georgia, demand for industrial power is surging to record highs, with the projection of electricity use for the next decade now 17 times what it was only recently. Arizona Public Service… is also struggling to keep up, projecting it will be out of transmission capacity before the end of the decade absent major upgrades. Northern Virginia needs the equivalent of several large nuclear power plants to serve all the new data centers planned and under construction. Texas, where electricity shortages are already routine on hot summer days, faces the same dilemma. The soaring demand is touching off a scramble to try to squeeze more juice out of an aging power grid… ‘When you look at the numbers, it is staggering,’ said Jason Shaw, chairman of the Georgia Public Service Commission…”

March 5 – Bloomberg (Leslie Kaufman, Saijel Kishan and Nadia Lopez): “It is so easy to start a wildfire. A smoldering campfire, a lightning strike, an errant firework or a spark from a power line or a hot muffler: However California’s next monumental blaze begins, the toll will be vast. People will be injured, some will die. Thousands of homes will be destroyed… Some 11 million people live in California’s high-risk wildfire zones, areas that include Los Angeles county, San Diego and the vineyards of Napa and Sonoma. Not long ago, they and homeowners in natural disaster regions around the US would have almost certainly had insurance through a big, national company… But a growing number of insurers are cutting their business in those areas, deterred by more intense and frequent natural disasters, plus state-imposed limits on how much they can charge.”

Geopolitical Watch:

March 3 – Reuters (Hyonhee Shin): “South Korean and U.S. militaries kicked off their spring drills on Monday with twice the number of troops joining compared to last year, officials said, as the allies seek to better counter North Korea’s increasing nuclear and missile threats. The Freedom Shield exercises, set for March 4-14, come as North Korea continues to develop its nuclear capabilities with missile and other weapons tests. It will also be first since Pyongyang scrapped a 2018 inter-Korean military pact in November.”

March 1 – Bloomberg (Jonathan Tirone): “Iran’s decision to reduce its stockpile of near bomb-grade uranium in favor of producing a specialized fuel for advanced civil nuclear reactors may be a negotiating tactic, according to western officials. Under most circumstances, a move by Tehran to scale back its inventory of highly-enriched uranium would be welcomed by diplomats at the International Atomic Energy Agency… But escalating tensions in the Middle East — including military clashes between US and Iranian proxy groups — has raised suspicions about what’s really happening in the Islamic Republic.”More By This Author:Weekly Commentary: On Fire
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